Fuel Tech Inc (FTEK) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 Fuel Tech, Inc. earnings conference call. My name is Steve, and I will be your operator for today. At this time, all participants are in a listen-only mode. Towards the end of today's call, we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Tracy Krumme, Vice President, Investor Relations and Corporate Communications.

Thank you, Steve. Good morning, everyone, and thank you for participating on today's conference call to discuss our fourth-quarter and year-end results. Joining me on the call is John Norris, President and Chief Executive Officer; John Graham, Senior Vice President and Chief Financial Officer; and Ellen Albrecht, Vice President and Controller. After John's departure, Ellen will be interim CFO until a new CFO is appointed.

As a reminder, the matters discussed in this conference call except for historical information are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in our forward-looking statements. The factors that could cause results to differ materially are included in our filings with the SEC.

The information contained in this call is accurate only as of the date discussed, and investors should not assume that statements made in this call remain operative at a later date. Fuel Tech undertakes no obligation to update any information discussed in this call, and as a reminder, this conference call is being broadcast over the Internet and can be accessed at our website, www.ftek.com.

With that said, I would now like to turn the call over to John Norris. John, please go ahead.

Thanks, Tracy, and good morning to everyone. We appreciate all of you joining us on this call.

Our results for the fourth quarter include revenues of $18.7 million, up 3% from the fourth quarter of 2008. Net income for the quarter was $0.2 million or $0.01 per share compared to a loss of $0.8 million or $0.03 a share in the fourth quarter of 2008.

Revenues for the full year of 2009 were $71.4 million, down 12% from $81.1 million in 2008. Net income for the full year 2009 was a loss of $2.3 million or $0.10 a share compared to a profit of $3.4 million or $0.14 a share in 2008.

In a few minutes, our Chief Financial Officer, John Graham, will discuss our financial operating results in much greater detail. John will also cover our balance sheet in detail, but it remains exceptionally strong, with very little debt and with a strong and rapidly growing cash balance.

Of note, our net cash provided by operating activities for the year was a very strong $13.5 million, which leaves us with cash and cash equivalents at the end of the year of about $21 million. Our business model generates a lot of positive cash flow, and as our earnings get back up to where they need to be, the cash flow of the Company should be quite remarkable.

Now let's take a closer look at the business behind the overall numbers. As most of you know, Fuel Tech is a fully-integrated company that uses an extensive suite of technologies to provide boiler optimization and efficiency improvements and air pollution reduction and control solutions to utility and industrial customers worldwide. For reporting purposes, we broadly group these technologies into two product lines or business segments -- a specialty chemical business for efficiency improvements that we call FUEL CHEM; and our air pollution control, APC, capital projects product line. Let's take a look at the results in both areas.

Our APC capital projects business sector saw revenues of $10.5 million for the quarter, up 21% from the fourth quarter of 2008. Revenues for the full year, however, were $34.7 million, which was down 22% from the full year of 2008. Gross margins were 38% for the year 2009, down from 45% in 2008. The gross margin decline has to do primarily with some low-margin catalyst management work we did this past year versus 2008, and to the timing of certain projects that resulted in a higher mix of lower-margin generating activities, and does not reflect any significant change in our margins for core technologies or equipment or our overall project profit margins.

Of most importance here is the state of the domestic market for NOX control specifically and pollution control in general. With the economic recession continuing in the US, electric loads are down dramatically, especially in the industrial sector. As power plants operate at lower loads, their emissions are reduced. With lower profits and cash flows, utilities and industrials are also not inclined to spend money on pollution controls, especially when the regulations with which they must comply are in a state of flux.

The Environmental Protection Agency, or EPA, says that they will have a revised Clean Air Interstate Rule, or CAIR, out in April of this year. While the details of what they might propose are not publicly known, in order to comply with the court directives, their new proposed CAIR rule would likely be significantly different from the current rules that are in place.

There is also a bill sponsored by Senator Carper which would fix this mess around CAIR and the Clean Air Mercury Rule, or CAMR. This bill addresses NOx, SOx and mercury reductions through amendments to the Clean Air Act and, if enacted, would greatly clarify the rules that emitters have to operate within and would let owners of facilities make informed decisions on capital deployment to reduce emissions. And I think they are holding hearings on that bill today.

Right now, they are largely -- customers are largely in the dark about what the rules would be, and that generally leads to a wait-and-see approach. Thus, the market is very depressed right now, and I see that continuing at least through the first half of 2010.

While we cannot just create a market in this area when these conditions are present, we can position our Company to achieve success when the market does emerge, and we have done just that, and today have the most complete suite of NOx control technologies of any company we know of in the world.

From the very first steps most companies take in NOx control, which are to limit the creation of NOx in the first place through low NOx burners and ultra-low NOx burners and over-fire air systems, through the most advanced selective catalytic reduction system in the world, Fuel Tech offers clients a one-stop shop for their NOx control needs. This capability is being recognized by utilities in the US and abroad, as evidenced by the alliance agreement with a major utility we announced earlier this week. That utility knows that they will get from Fuel Tech state-of-the-art NOx control at very competitive prices, so there is no need for them to be at each and every unit.

We have had other alliance agreements with other utilities in the past, and those have worked very well for both parties.

Now, deploying significant capital to reduce NOx emissions is not something that can typically be done in any single year, even when you know the regs, by a utility which has multiple units at multiple sites. While utilities and industrials do not know what the ultimate rules will be, a number of them are beginning now to deploy the first systems that they know they will have to buy eventually under any likely regulatory framework. So we are seeing now and will likely see in the coming months a few other project awards here and there domestically, even before the rules are clarified.

But I do not expect to see the domestic NOx control market really emerge in a significant way until after utilities and industrials have seen the proposed new regulations or a change in the law, which will occur later this year.

Backlog at the end of 2009 was a respectable $22 million, up substantially from the anemic $9 million at the end of 2008. During the year 2009, we announced about $38 million in APC contract awards, the largest of which was the $12.7 million domestic contract we announced in October of last year, the largest APC contract in our corporate history.

Internationally, 2009 was a good year, with revenues up 26.6% to a record high of $16 million. Europe saw its revenues more than double to its highest ever. While we'll continue to win projects in the European market in 2010, the larger market opportunities in Europe for us are in the UK and Poland, and that will start in about 2011, with major expenditures expected in the 2011 through 2016 time frames.

In China, revenues for 2009 were up 70% over 2008. We finished the year by announcing on December 30 two Chinese contract awards and then announced further wins on January 29 and February 24 of this year. The pace is picking up in China for NOx control, but the major market there will not likely emerge until we are into the 12th five-year plan, which begins on January 1 of next year.

The recent publication by the Chinese Ministry of Environmental Protection of its "fossil-fired power plants, NOx control emission prevention and control policy" on January 27 sets the framework for Knox control across the country in this next planning cycle. We would expect to see specific regulations being set forth in the provinces later this year, which will implement the policy.

It is of note that Fuel Tech's suite of NOx control technologies fits very nicely into the specific technologies called out in the policy for the various plant situations, based on size, age and coal consumed. Much work has gone in to positioning Fuel Tech for this very market, and we expect to be very successful there over the next decade.

In our FUEL CHEM business sector, the fourth quarter of 2009 saw revenues of $8.1 million, down 14% from the fourth quarter of 2008. For the full year, revenues in 2009 were $36.7 million, and that matched the record levels achieved in 2008. Margins in 2009 were 43%, which were down from 46% in 2008.

Margins were impacted by programs operating at partial loads and by contracted increases in our chemical and transportation costs, which we chose not to pass on to clients in 2009, given these tough economic times for them. Another important driver of that reduced margin was a large risk share from a domestic program on a very large unit that was performed in 2009, but the customer decision was not announced until the first quarter of this year. We are very pleased to announce that this major risk share of about $2 million will be recognized in the first quarter of 2010.

For those who may be new to the stock, a risk share on a FUEL CHEM demonstration is where we will put revenues at risk during the demonstration period, and then only recognize those revenues if the client deems the demonstration a success and moves forward with a commercial program. When our risk share is recognized on our books, it will show up as additional revenues, but with no increase in the cost of sales, since we would have already recognized all the costs when they were incurred. So it will go right to the bottom line.

One really neat aspect of this particular situation is that the demonstration involved a head-to-head competition with a major competitor, and FUEL CHEM won that hands down.

However, hidden in the details of the FUEL CHEM numbers is a market situation that is problematic in the short term. With a very mild summer across the nation last year and with industrial electrical loads off significantly due to the economic recession, many of our customer units are being run at reduced power levels or even being shut down for periods due to reduced electrical demands. When our customer units run at reduced load levels, then they use us at much reduced amounts, as the greatest need for FUEL CHEM is when the unit is running very hot to produce maximum power. Thus, our revenues per unit are dramatically lower in many cases.

Since we are still paying salaries for our people operating and maintaining the equipment, and those are the same even when we are running at partial load ourselves, the gross margins are down at many of our customers' sites. As the economy recovers, we should see rather dramatic increases in revenue and margins, so there is a built-in upside. But I do not foresee that happening in the first half of the year.

The biggest single unknown for this year for FUEL CHEM is whether this will be a hot or a mild summer. Electricity demand goes up dramatically in very hot weather due to air-conditioning loads.

Because of the wide variability in revenue and gross margins with our coal customers right now, we are suspending the publication of our list of FUEL CHEM customer units broken down by [size and] fuel type. The current situation makes using those numbers with any sort of guidance from us as to expected revenues for specific sizes of units very misleading. The whole purpose of the list in the first place was to help analysts in modeling our FUEL CHEM business sector, and there is just no way for us to provide such guidance for the units on the list right now.

For general information, we currently have FUEL CHEM systems installed and operating or ready to operate, based on customer needs, on 40 coal-fired units and on 51 other fired units around the world. We will consider re-publishing the list when this current market situation settles down and the numbers can be used in a reasonable way to model our corporate performance in this business segment.

Now I would like to turn the call over to our Chief Financial Officer, John Graham, to discuss in greater detail our financial results. John?

Thank you, John, and good morning, everyone. As John spoke of several of the consolidated and segment revenue and gross margin numbers and the business reasons behind them, I will focus the balance of my comments on the underlying detail, the analysis of SG&A expenses and certain items for 2009 and 2010 that may help you financially model our business better in the coming quarters.

Consolidated revenues for the fourth quarter ended December 31 were $18.7 million and were $71.4 million for fiscal 2009. Despite FUEL CHEM revenues equaling the record amount reported for all of 2008, the lower APC revenue base, for reasons John mentioned, resulted in full year-over-year revenues being down almost $10 million.

Given a near-term fixed component of our SG&A expenses, which includes the incremental expense from our three recent acquisitions and the amortization of identifiable intangible assets, the gross margin dollars generated in the year were insufficient to fully cover SG&A expenses and resulted in a net loss of $2.3 million, or negative $0.10 per diluted share compared with net income of $3.4 million or $0.14 per diluted share for fiscal 2008.

Now let's go through each of the segments in a little bit more detail. In the FUEL CHEM segment, fourth-quarter 2009 FUEL CHEM segment revenues were $8.1 million, an increase of 14% versus the fourth quarter of 2008. Revenue gains associated with new customer commercial units and demonstration programs were largely offset by the shutdown or scaling back of chemical injection at certain client units experiencing depressed electricity demand.

Of the $8.1 million in segment revenues, approximately $6.8 million was from coal-fired units, while quarterly revenues from non-coal-fired units was the balance of $1.3 million.

Despite the economic recession, we continue to have very strong market penetration for new FUEL CHEM demonstrations, both in the US and abroad. In 2009, we announced 10 additional FUEL CHEM orders; many of them went or will be going straight into commercial status, thus avoiding the traditional breakeven multi-month demonstration phase. This will also avoid some of the gross margin dilution normally associated with a new order that involves a demonstration period. These orders have been received from the US, China, Korea and Mexico, thus lending further substance to the global applicability and market potential for the FUEL CHEM program.

And John mentioned the good news we recently received about the very large unit that will be going commercial in the first quarter of 2010, thus allowing us to recognize approximately $2 million in risk share revenue.

Quarterly margins for the FUEL CHEM segment increased from 36.8% in the fourth quarter of 2008 to 48% in the current quarter, primarily as a result of reduced domestic and international demonstration program expenses, as many programs were transitioning to commercial status or in the final evaluation period.

The base FUEL CHEM business generated a gross margin of approximately 48%, a healthy sign that activity at existing accounts is starting to ramp back up.

From an operational standpoint, we continue to keep an adequate supply of FUEL CHEM systems ready to deploy in the US, with additional units in China, so as to be able to install them as quickly and as prudently as possible on the receipt of new orders.

Let's move over to the APC, or Air Pollution Control, segment. Fourth-quarter 2009 revenues for this segment were $10.5 million, an increase from the fourth quarter of 2008, which saw APC revenues of $8.7 million. Including the orders received during the quarter, the APC backlog amount at year-end was $22.0 million. Since then, we have announced almost $5 million in additional APC orders. While the near-term revenue recognition of this segment is depressed, the signs of recovery are beginning to be seen, as indicated by the ever-increasing bid and order activity, especially in China, and to a lesser extent in the US.

Quarterly APC segment gross margins were 39.1% compared with 44.0% for the prior-year quarter. A significant reduction versus the prior year is primarily due to a pass-through catalyst sale at a nominal gross margin -- in the single digits -- and the timing of project milestones for other contracts that primarily involve lower-margin revenue-generating activities, such as initial engineering design and project startup activities in support of the APC projects. Absent these items, gross margins were still on par with historical levels, reflecting the strength of the APC core business.

On a consolidated basis, gross margin percentage for the fourth quarter of 2009 were 43.0%, an increase from the 40.2% in the fourth quarter of 2008, all reflective of the industry recovery we are just beginning to see.

Quarterly SG&A expenses, excluding R&D expenditures, were $7.1 million, a slight decrease of $78,000 versus the fourth quarter of 2008. The increases we experienced in 2009, due to our new sales commission plans and the additional salary and other costs incurred from the ACT acquisition in 2009 in January, were offset by midyear personnel and other expense reductions in response to the suppressed levels of overall revenue versus fiscal 2008.

Now just a note about our adjusted fourth-quarter 2008 financials, and you will want to focus in Note 2 of the Form 10-K that we will file later today. During the fourth quarter of 2008, Fuel Tech incurred approximately $390,000 of acquisition-related costs, which were recorded as a prepaid expense on the 12/31/08 balance sheet. The ACT acquisition was closed on January 5, 2009, and the final purchase price allocation was made during the first quarter of 2009.

The pre-paid costs that were on our balance sheet as of December 31, 2008 were included in the final cost allocation of the ACT acquisition, and ultimately went into the goodwill balance. FAS 141(R), which was effective for Fuel Tech on January 1, 2009, requires that the direct expenses related to an acquisition be charged to expense and not recorded as consideration paid for an acquisition, and the 2008 financial statements have been adjusted to apply the new method retrospectively.

The initial allocation of purchase price reported in the March 31, 2009 quarter inadvertently included the direct acquisition costs and goodwill. The goodwill balance was corrected during the December 31, 2009 quarter to properly reflect the appropriate accounting under the new standard. The interim quarters will not be adjusted, as the differences reflected within the balance sheet were not material.

In short, this had no effect on the 2009 income statement or cash flows. We will show amended 2008 financial results in the Form 10-K that will be filed tomorrow morning -- excuse me -- filed later today, but this is not a restatement; this is simply an adjustment to clarify some geography on the balance sheet. It is a non-cash event that involves a reduction in goodwill by about $390,000.

For modeling purposes, full-year amortization expense, primarily related to the identifiable intangible assets from the three recent acquisitions, was $1.3 million, and full-year FAS 123(R) stock compensation expense was $6 million on a pretax basis.

Quarterly research and development expenses were $151,000 and were centered upon developing and testing technologies with near-term market applications in both boiler optimization and air pollution control arenas. The decline versus the fourth quarter of 2008 is due to the Company moderating its near-term R&D expenditures in the wake of the economic turndown.

However, we have maintained our focused approach in pursuit of commercial applications for our technologies outside traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities. As always, we continue to watch the domestic and international emission regulatory landscape to ensure Fuel Tech is continually properly positioned to meet the emission control needs of our customers.

For emissions like Mercury and SO3, we continue to examine and develop various technology products and solutions to identify ones we feel are commercially viable.

The year-over-year decline in quarterly interest income is due to the reduced cash balance available for investment, as we spent over $26 million for the acquisition of three strategically significant companies in October 2008 through January 2009. Couple that with a decrease in the average return earned on those invested funds. And the slight change in other income expense is driven solely by foreign exchange translation movement; again, a non-cash type item.

Due to the mix of actual domestic and international revenue and net loss levels achieved for full year 2009, we have adjusted the full year 2009 tax provision rate down to 32.4%. To effectuate this adjustment, the fourth-quarter provision rate had to be made at 62.6% in order to achieve a full-year rate of 32.4%.

Even after considering the cash outlay for the three recent acquisitions and the funding of and purchase of a new corporate headquarters building, our balance sheet remains very strong. Cash, including a nominal restricted cash amount, has increased to above $21 million, and other than our $2.9 million in debt in China related to the startup of the Beijing Fuel Tech office and to support near-term growth opportunities, we have no other debt on our balance sheet.

Working capital at quarter-end was a strong $30.6 million, and we have not seen any deterioration in payment patterns from our customers, either domestically or abroad, APC or FUEL CHEM, in the wake of the global financial situation.

The restricted cash you saw on the balance sheet at June 30 of $5.5 million that related to the collateralization of outstanding letters of credit and bank guarantees while we transitioned out of Wachovia into JPMorgan Chase has now been reduced to $200,000 at December 31, as we are wrapping up the transfer of these instruments to JPM Chase. Restricted cash should be at or near zero by the end of the first quarter 2010.

Recall that Fuel Tech entered into a domestic $25 million line -- excuse me -- revolving credit facility with JPMorgan Chase on June 30 of 2009. The facility contained, among other items, covenants relating to profitability, debt levels and capital expenditure amounts on an annual basis.

For the fourth quarter of 2009, all financial debt covenants were met.

Finally, on the statement of cash flows, full-year operating cash flows were $13.5 million, an increase of $6 million during the quarter, driven by the add-backs of the non-cash items, including depreciation, amortization and stock compensation expense, and some good working capital management.

Cash used in investing activities of $22.4 million was primarily for the aforementioned ACT acquisition.

For 2010, for modeling purposes, maintenance CapEx will remain below 1% of consolidated revenues, and the majority of all CapEx will be to support and enhance the operations of the FUEL CHEM technology segment.

For now, a safe rate to use for income tax provision for 2010 is 40%, as we do expect our international operations to achieve certain financial results that will not require us to valuation allowance as much of the results that we have as we have historically.

Stock compensation expense can be modeled 10% to 15% below 2009 levels. Finally, until additional regulatory clarity is obtained on the domestic front, with EPA and CAIR primarily, it would be irresponsible for us to attempt to quantify 2010 consolidated revenue levels at this time. We will certainly revisit this each quarter and do our best to provide meaningful guidance at some point in the future.

Before I turn the call back to John, I want to thank you all, all you I've worked with over the past two years, as I wrap up my time here at Fuel Tech. It has truly been my pleasure to do the investor calls and the meetings and the one-on-ones and all the conferences. It has been a wonderful experience, and I thank you for your support historically and also prospectively, as Fuel Tech continues to work towards realizing its goal and its true potential that our business model contains. John?

Thanks, John, and we are going to miss you too, buddy. Operator, with that, let's open up the call for questions.

(Operator Instructions) Rick Hoss, Roth Capital Partners.

Good morning, gentlemen. First, more granular type questions. That deferred $2 million in backlog -- I'm sorry -- in risk share, is that in backlog?

No, it never appears -- risk share never appears on our books. It is totally sitting out there -- it is contracted that way with the clients -- I mean, it is under contract. But it is their call. So you don't see it on any books at all. It is not in backlog. It is nowhere. But it will appear in the first quarter.

We don't show it because they are not financially or contractually obligated to pay it until they go commercial. So until that time frame, it is not an obligation on their part nor an amount due to us, nothing we can recognize. But it will come through as pure revenue with no cost, so straight flowthrough to gross margin. So you will see a pop in the first-quarter gross margin percentage for the FUEL CHEM segment.

Okay. And then the SG&A bumpdown sequentially was pretty substantial. Can you give a little bit more detail on what happened between the third and the fourth quarter?

Yes, let me grab my -- my note on that. I may have to do a follow-up with you on that one, Rick. I don't -- hang on one sec. You try to prepare for every question except that one.

Okay, what we are seeing between third and fourth quarter, an almost (inaudible) number, is a decrease in the SG&A and foreign operations, commission expense in the quarter between third and fourth quarter, and overall reduction in legal costs, as we had some strategic legal expenditures we made in third quarter that did not replicate in 4Q.

Okay, so a couple things. Now, as far as the fuel switching risk, which seems to be a topic of conversation a lot these days, as natural gas stays cheap, what are you seeing out there as far as your customers that have traditionally been very coal-heavy looking at natural gas generation, or just -- or switching over in the meantime? I think the EIA published something yesterday that talked about coal generation being down 10% in December, where natural gas -- I'm sorry -- coals was down 1.5% and natural gas was up 10%.

You are going to see some of that, Rick, and it depends on which units that utilities may have taken down for outages. You can't -- when you are talking about gas and fuel switching like that, you really can't burn natural gas effectively in a coal unit. So you are not talking about switching fuels for a coal unit. You are talking about whether you are going to dispatch a coal unit or a gas unit.

And when natural gas is down in overall price, they are going to dispatch the most cost-effective units. But for most utilities, coal is still -- you know, gas is running what -- $4.70, $4.80, 1 million BTUs, which puts their production cost still probably $10 a megawatt hour north of a coal unit. But natural gas units, especially turbines, can ramp up and down quicker.

So where you have peak load, sometimes you will see gas come on preferentially in those kinds of situations. But environmental factors, as you go forward, will -- I think natural gas, you will see it come up some. But there is no way gas is going to replace coal as the significant fuel source in the United States in this decade or the next.

Okay. And then last question, and sort of along the same lines as the last one, was do you see risk from CAIR being too stringent? And what that means is that the cost to take an older legacy coal-fired power plant would be so onerous that the utility would just decide to shut it down and not bother. Or how do you see that playing out?

Obviously, that is a question that utilities ask themselves. If it gets too expensive to outfit a small unit, then they will go do something else. And I expect we will see in the United States some of the smaller 100-megawatts and less units -- that's going to be true in China, too -- where they will be shut down versus modified.

But one of the things that we offer, Rick, that your question gets right to is the most cost-effective NOx control. In the past, if units were forced to get below, say, 0.1 pounds of NOx per million BTU, then the only option was a full-borne SCR.

Now, our layered Advanced SCR can get you down as low as any NOx control system in the world, and we can do that at a fraction of the cost of the other systems. And it is layered, so that it works just fine in partial loads, whereas -- and that is very important for smaller units that are going to be ramped up and down in load follow. So I like to think that our NOx control measures actually are going to be right in the sweet -- right where people are going to be needing them with stricter regulations. But we'll see what those regulations are.

Okay. Thanks for taking my questions, and John Graham, good luck to you.

Great. Thank you. I appreciate it.

John Quealy, Canaccord Adams.

Nice quarter there, and I apologize if this has been asked. Two questions. One on APC, when you look at the business that you did in calendar 2009 and the business now that we have in backlog, $22 million visibility, or (inaudible) [18] or whatever to $22 million in 2010, how much of that was pushed out from '08 into '09? Or was that all greenfield 2009 award new business, if you will? You get what I'm saying?

Yes, that is really all of -- stuff we won in -- there was one project, actually in China, that was a carryover. But I think all of the rest of it was stuff we've won and stuff we've won more recently. We are actually -- most of these projects are being done quicker. The Chinese projects are being done extraordinarily quick. We are turning those things around in a few months versus the much longer period that we see others.

But it was won in 2009, most of it won in the second half of 2009, and almost all of it will be -- the vast majority of it will be worked off in 2010.

And I apologize -- again, I dropped off a lot -- in terms of guidance, have you guys not given guidance for 2010?

We have not given guidance. Until we see what -- two things. Until we see what the regulations are going to be, either Carper's bill, which I personally think has a shot, or the EPA's new revised CAIR, really don't have a feel for what the US market will be.

And then the other part is how quick will the economy recover, and how hot will the summer be? If it is another mild summer and if the economy continues to languish, that will have a dampening effect on our FUEL CHEM, even with the significant going commercial of the large unit that we talked about.

Okay. So if I can come back to last year, with the booking or the backlog at $9 million in Q4, and you had a healthy number for calendar year 2009, I mean, that was a pretty big business that you ate through, so to speak, and you had no visibility on.

Given that CAIR, whatever it is going to do in the springtime here in an election year, do you see that potential and visibility saying your 9 to 20 -- is it that type of multiple that you could do this year, or no, it is just too uncertain?

Right now it is uncertain. But John, I will tell you, I don't see any scenario out there that isn't -- that doesn't mean more NOx control business. The Carper bill would -- creates a trading zone to the east and west for the US, and then it starts ramping down to lower levels in 2012, which utilities have to start deploying stuff early to meet those dates. And the EPA is almost certainly -- they are not going to -- to comply with the court order, they are not going to be able to have much of the cap and trade approach. So it will be command and control per unit or per site. And all of that will mean more NOx control.

So the question is how much and how soon. I don't think there is a question of if the market is going to be there.

Okay. And my last question, so you talked about FUEL CHEM periodically benefiting from revenue being recognized on these test units with no associated cost of sales. When you look at your pilot fleet for FUEL CHEM right now, can you quantify either the number of units or the number of revenue that if these guys accepted you for a longer-term agreement that you would have a certain amount of revenue hit with zero cost of sales, that would potentially help margins? Can you talk about that?

Well, we have the $2 million that we are going to recognize in the first quarter of this year that will come in as a pure profit. Beyond that, we have a few other projects in demonstration, John, one of the most important of which is in China.

In that particular case, it is not so much of a risk share issue, but the importance of the validated positive results that FUEL CHEM can deliver. So the large amount of risk share, I don't see that being -- normally, we only have a few hundred thousand dollars of risk share at any given point in time out there. This has been a huge anomaly for 2009, and I think it will go back to more normal now.

Okay, thanks, and John Graham, good luck.

Thank you, John.

Jeremy Sussman, Brean Murray Carret.

You spoke about the next five-year plan in China obviously having a potentially nice effect for you in 2011. But can you talk a bit about this year. Maybe what do you expect at the provincial level, and what could this potentially mean for you guys?

Well, we are already seeing a pretty good rampup in bid activity in China. And I think you will see that -- in the Chinese way of doing business, they are bidding stuff, and when you are awarded a bid, they expect you to go ahead and get started on it. But it may be two months before they end up giving you the contract. And that is just the way it is. Once you have been awarded, you are almost certainly going to get a contract.

We will -- if we are in such a situation, we would work on that project although the costs would have to go into SG&A, until we get a contract that we could then roll the costs out of SG&A and put them on the books as a project. And we won't announce it -- we won't announce Chinese contract awards. We only announce signed contracts. That's true all over.

I think you will see the amount of awards and contracts start ramping up. But the real market, the big market going forward, is going to happen in that 12th five-year plan. And the policy was exactly what we had hoped it would be. It called out the use of Advanced SCRs in addition to SCRs for units 600 megawatts and smaller. And it specified NOx controls on every unit that is 200 megawatts or larger, and all units in those focus areas, and specifically recognized SNCRs.

The first thing every unit 200 megawatts or more has to do is low NOx burners and over-fire air, which is, again, one of our specialties. And for units that are deploying a catalyst in all populated regions, the recommended chemical is urea. So that fits nicely with our ULTRA wins, which is why we are seeing ULTRA wins out there. Folks know that is coming.

So we are really encouraged by the policy. For our business, I think it is right what we hoped it would be. But I think you will see the market really start taking off, Jeremy, next year.

It will ramp up substantially this year over last year and over the year before, but the market will really take off, we believe, next year.

That's great. I appreciate the color. And just as a quick follow-up, switching back to the US, can you talk a bit about how the alliance agreement that you signed with a major US power producer kind of came about, kind of even especially in light of the continuing uncertainty over here?

Well, that utility ran a demonstration. We have a demonstration capability in our APC line. I don't know whether, Jeremy, you've ever seen our trailer, but we have a whole system mounted on a tractor-trailer that we will take in and demonstrate the effectiveness of an SNCR system. And we ran some tests this year and validated for that utility that that technology could get them to the levels that they hoped to achieve. And they recognized that we are the best out there in that particular technology arena, and we offered them a good price that goes forward.

Typically, alliance agreements, you operate with a not-to-exceed kind of price margin, but they know what your profits are going to be and margins. And those have worked very, very well. We've had one with some other very major utilities, and we were able to point to that, and the client became convinced that was the best way that they wanted to go.

That's great. Nice quarter, and good luck, John. Thank you.

Thank you, Jeremy, and I look forward to seeing you at your conference tomorrow.

Graham Mattison, Lazard Capital Markets.

Good morning, everyone. A question on FUEL CHEM. It seems like you guys had a lot of conversations with customers going on in sort of positive light. But what is holding them back from pulling the trigger in terms of putting more units online or doing more demonstration or adding more across their fleet?

Well, right now, it is that the units are running at about half load, and at half load, the amount of slag that you get from most units --. When I say units are running at about half load, that is not all units. Some units in some situations are absolutely -- they are base-loaded, especially the larger ones.

And so you've got some situations where a unit absolutely needs you, and we've got other situations where units are running at partial roads in certain markets. And those units even when they would normally need you, when they are running full out, when they are running at half power, they certainly don't need us as much.

The other part is a lot of utilities are really hurting for cash. And, you know, they will defer anything they can, even if it may mean more maintenance later. They have to look out for their short-term issue.

The good part about this, Graham, about the situation we have, especially with this most recent head-to-head test and demonstration, is that particular utility, I hope and believe, will be a testament to us and the effectiveness of our program to other utility brethren, who will come and visit. And it is really nice to having those sort of head-to-head results. So we are real positive about that.

But right now, you make your case, and we try to get it into the cost of fuels where we can, and that makes it more acceptable when you can do that. And we've had one recent good result in that regard. But we will -- we are continuing to press, but I don't expect to see a lot of new announcements in FUEL CHEM right now in this market condition here in the US.

Got it. Makes sense. And then on the APC side, in the past talked about opportunities in nonutility applications. Could you just get us an update on what you are seeing there and how the regulations might impact them and the potential market opportunity for you there?

Well, the regulations are going to apply to all kinds of major emitters. The Clean Air Act, right, calls for anything above 250 tons, I think it is, on an annual basis. And those rules are being phased down to the smaller and smaller units. University boilers are needing to be cleaned up. Industrials of all sorts.

There is really thousands of units in the US that haven't done anything on NOx control of substance. And these new regs, whether they are the EPA regs or whether it is the Carper bill, are going to go to apply to all of those.

So we are seeing a lot of -- now, the industrials most likely won't have to put on SCRs. They'll have to get down to the SNCR kind of level, in all likelihood. And so you will see a lot of industrials going to SNCRs. Some University boilers that are putting -- we have a small packaged SCR, and we have a little mini ULTRA that goes on to some of these smaller applications. And you may see us announce some of those.

They don't -- they are not huge revenue generators for us, but the margins are nice, and the market -- the sheer number of potential customers there is enormous.

And in terms of the timing when that would be with these bills coming through, that would be more like an 2011 to 2012, or could they start to ramp up in the end of 2010 possibly?

Well, that's a real good question, Graham, and I give you my best guess on that. The Carper bill would say, hey, we are going to codify CAIR as is through 2011, and then in 2012, it starts ramping down. And they have these two zones where now, under the Carper bill, the western half of the US will be under a similar kind of NOx control; so far, they have not been.

The EPA, I would expect the EPA's restrictions to be even tougher, if they go that route. Once those regs are out, and say the reg, if it was Carper and it said 2012, that doesn't mean you can wait until 2012. That would mean for most folks right away, they would know the rules and you start planning.

When I was running AEP's fleet and the first zip call went in, it was May of 2004 when it went into place. And we had to hurry and put our first SCRs on to get them on in 2001 to start building up credits, because the overall NOx control plan was going to take six, seven, eight years.

I think you would see the same kind of thing. You would see people hurrying to start ordering the second half of this year. They would have to order second half of this year to even get them into the spring outages of 2011. And then maybe order more in the fall, late fall, for the fall outages of 2011, if they are going to meet a 2012.

So I think you will see the deployment start, I believe, if the regs all come out or if this law passes in the first half of this year, you will see the business orders start picking up in the second half of this year, and then it would really pick up next year. That is my best guess today, but it all depends on the regs.

Got it. Great. That's very helpful. Thank you very much. And John Graham, best of luck going forward. I'll jump back in queue. Thank you.

I appreciate it. Thanks so much.

(Operator Instructions) Rich Wesolowski, Sidoti & Company.

Recognizing first that any restatement of CAIR would be positive for your business, can you tell us what the main variables of a new rule would be that would render it more or less favorable for SCR investment relative to your SNCRs?

For our Advanced SCRs, right (multiple speakers)?

The alternative method, as a blanket statement.

Right. Even if somebody puts on a big SCR, we have all kinds of things that we would try to sell them -- ULTRAs and catalyst management and our Ammonia Injection Grid and Graduated Straightening Grid that could really help even a big SCR that they might buy from one of the major AE firms. We can be all over one of those projects, too.

But the regs, to your point and your question, I hope, I suspect the major difference between where I think Carper and the EPA, Carper's bill would amend the Clean Air Act to allow for cap and trade for NOx. That is one of the things that was allowed in the SIP Call, but that the courts - when they threw out CAIR and later reinstated it and gave the EPA a mandate to come back and fix CAIR -- they said that they didn't believe under the Clean Air Act that cap and trade was legal to comply with NOx in the way that NOx needed to be controlled for the Clean Air Act.

So if it is the EPA rule that comes out and this bill doesn't pass, then I think you will see the EPA not have a cap and trade, but be more of a command and a control per unit, per site, which will be more expensive for utilities and probably mean a little more business for us.

To -- I forget who -- Rick Hoss or somebody asked earlier -- it might mean a few more units are shut down, though, in that scenario.

But if Carper bill goes in, then there is that cap and trade that utilities really like, then that way they can manage across their fleet and over control on some big units and under control on some smaller units, and it allows them to optimize their costs.

There is still a lot of work because then they'd know what the rules are and they can go about it. And those rules ramp down -- you get a 2012 kind of ramp down, and then there is another ramp down in 2015. And so I think there is a lot of work in either case. I suspect that if it is the EPA rules, we would get a bit more work. Long answer, but I hope that helps explain (multiple speakers).

That's perfect. And then secondly, the number of your FUEL CHEM operating units has declined considerably during the recession, according to your own list. But a lot of those are still on there, they are just kind of dormant, as I understand it.

Yes, they are running at partial loads, some of them. They will be down for a month, up for a month. The reason for us pulling the list was, okay, I know this unit is going to be off for two months. But it's going to come back right after that. Do I put it in the list? That's not real useful for the next quarter, but it is useful for the second half of the year.

We were really -- and if we think it is going to run at half load, then our guidance of $1.5 million or $1 million per unit per year for that kind of unit is not really right, at least not in the short term. So that's the reason we pulled the list.

But we are out there on 40 units that -- most of which -- the large majority of which are operating today. There are a few of those that are -- the unit is either off-line right now because of load or that they are running at half power and they have shut us off at that that. Or in just a few -- very few cases, they've gotten a short supply of some very good coal -- because with the strong US dollar, the Appalachian coal is not being exported as much, and it's coming back into the market a little bit. So you get a few deliveries here and there where they will say, okay, for the next month, we've got this really good coal and we're not going to be burning it. But keep it on, because that contract is going to end, and we are going to be right back.

So the units are kind of all over the map, and we've got a few of them that are running just flat out, and they are doing great for us. But we are on 40 coal units and 51 others. I would say the other units, the 51, we have generally given guidance and said that is about $5 million a year in revenue, and that is probably still good for those.

Right. I think my point being that if the economy recovers and electrical load recovers, the number of your FUEL CHEM units contributing would go up without you selling even one.

Absolutely. And that was the point I was trying to make, and your question is right on in that. There is an underlying value to those existing units that is not being seen in the current market conditions.

Lastly, would you care to venture a guess as to the share that have been taken off, that have actually been removed from customer boilers, rather than just removed from the list?

There are just one or two of those, and that (multiple speakers).

Of the four (multiple speakers).

Yes, of units that we've actually removed equipment from. That is a very, very, very small list.

Excellent. Thank you.

Jeff Osborne, Thomas Weisel Partners.

Good morning, guys. Just had a couple questions. I was wondering if you could, John Graham, go over the APC revenue in 2009 versus 2008, and perhaps detail what the organic growth or lack thereof was in that business. I recognize you made three acquisitions and they are fully integrated, but I am just trying to get a sense of the core legacy business and what a true apples-to-apples comparison is.

Sure. When you take a look at -- it is tough to say organic in a capital projects type sale. One year, you could have eight large projects, the next year, 14 small projects and still have overall growth -- with the kill-and-eat type mentality.

But I can tell you this. From the three main acquisitions ACT, FlowTack and Tackticks, approximately they contributed about $15 million of revenue in all of 2009, which would have been incremental to what we would have reported in 2008, having had ACT in our business model only for 2009 and Tackticks and FlowTack only in fourth quarter of '08. And they would have driven approximately -- let's see -- on a year-to-date basis, approximately -- just under 40% margins across those incremental revenues.

Got you. That's very helpful. Thank you.

And then for John Graham, six to 12 months ago, there was a lot of discussion on these calls about the Guangdong province and the Asian Games coming up. And you've had a few press releases over the last couple of quarters in that region, but nowhere near on the order of magnitude that I would have been expecting relative to a couple quarters ago.

So I was just wondering if you can update us on kind of what happened through that process, what -- if there were competitive technologies that were chosen, and if we should be using that region as a microcosm for the greater China region as these rules and regulations are set.

Jeff, those awards are still happening, and most of the flurry -- you know, the city put out its regs effective right away, and I think the province was a little more delayed. The city wants to get ready for the Asian Games.

Projects for the Asian Games that are going to be installed this summer are still being bid. In fact, I think we got one on -- Linda told me we had one that the client told us on Monday request for a bid, the bid was due on Wednesday and should be decided on Friday. There is a flurry of bid activity, and projects are being awarded in that region, and in others, but in that region right now for projects that can be done. We have -- and will be done. And in some cases --.

What is the installation time on those? Because I was thinking the games were this summer, so (multiple speakers).

They are. And I think I mentioned last time, at one of the last calls, that we have dramatically reduced the amount of time. Where it used to be six to nine months was what we would do -- we could turn around in China, using China's manufacturing and stuff, we could typically do that in three months.

Okay. And then just two questions for John Graham on FUEL CHEM. I may have missed it. But can you just again remind me what the impact was on margins during the fourth quarter from any demonstration units? And then also just confirm the $2 million that hits in the first quarter, is that essentially 100% profit?

Right. So the $2 million that will come through on risk share revenue by default, by definition, will be a straight, full passthrough to the gross margin line. So you have revenue with no cost there.

From a margin standpoint, we reported all-in segment margins of 48% for the quarter. That approximated what the base business did as well. So we had -- well, you've got a little bit of movement up and down in between there for various items. For the most part, the demonstrations had no impact on the fourth-quarter margins. And that based margins of 48 replicated the overall segment margin of 48.

Very good. Thanks much, and good luck in your next position, John.

Thank you very much. Appreciate it.

And that concludes the Q&A portion of today's call. I would now like to turn the call back over to Mr. John Norris for closing remarks.

Thank you very much for joining us on this call, and we look forward to seeing what the future holds for us this year. And you all have a good day. Take care. Bye-bye.

Thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Good day.